International Tax Competition And Location Choice Of FDI

How does international tax competition affect MNCs' overseas investment location decisions? In view of the favorable promotion of foreign direct investment to national economic growth,employment and technological progress,how do countries formulate appropriate policies to attract foreign investment? What is the impact of the "bidding war for firms" among countries for foreign direct investment on the welfare of countries? Is the theoretical framework for circulating capital competition also applicable to the analysis of foreign direct investment competition among countries? Answering these questions is one of the important missions in the field of international economics and industrial economics.At the same time,under the background of the Belt and Road Initiative and Chinese enterprises going out,solving these problems can provide some theoretical support for government decision-makers to attract FDI,optimize the allocation of foreign investment,and also provide some theoretical support for enterprise managers to make overseas investment decisions more effectively and avoid overseas investment risks.This is the purpose of this paper.There are many papers on the factors affecting the location choice of foreign direct investment in the existing literature,but they are usually limited to the endowment and policy environment of the potential host country,while ignoring the attractiveness of other countries to foreign direct investment.Therefore,the main work of this paper focuses on solving two problems.In particular,it is pointed out that the so-called "international tax competition" studied in this paper does not only refer to the government's use of tax means to compete for FDI,but also includes a large number of policy preferential means,such as various subsidies,tax rebates,land concessions,the establishment of economic development zones,and so on,to attract FDI,is a concept in a broad sense.In the positive aspect,this paper introduces the location choice of foreign direct investment to the theoretical framework of international tax competition,and answers how to determine the FDI location decision of multinational corporations in the presence of international tax competition.In the normative aspect,this paper regards the FDI location choice in the absence of international tax competition as the benchmark model,and answers how the welfare changes when the country participates in the international tax competition.The theoretical framework adopted in this paper is the "bidding for firms" model in the framework of international tax competition,rather than the ZMW model(Wilson,1986;Zodrow & Mieszkowski,1986)or K-K model(Kanbur & Keen,1993)commonly used in international tax competition.This is because the research object of this paper is the productive investment,e.g.FDI,which aims to maximize the operating profit by setting up a factory in the host country,while the traditional international tax competition model is mostly focused on floating capital,so it is not suitable for this paper.Starting from the typical facts,this paper selects three perspectives: political factors,marginal cost and central government regulation.This paper studies the impact of international tax competition on the location choice of foreign direct investment based on FDI competition model constructed by Haufler & Wooton(1999)and Ma(2017).Firstly,at the level of political factors,in the case of special interest groups lobbying,this paper studies the impact of international tax competition on MNCs' location decisions and welfare analysis.In the expansion part,the impact of the change of factor market pricing mechanism on the above results is further considered.In this part,this paper pays attention to the common collective behavior in foreign countries—interestrelated special interest groups can lobby the government through political contributions to change the government's attitude towards foreign direct investment which can affect the final location results of multinational corporations in the international tax competition.Then this paper also pays attention to the performance of degree of corruption of the host government in international tax competition,which has not been paid attention to by similar studies in the past.Secondly,at the level of production cost,this paper takes into account the impact of international tax competition on MNCs' location decisions and welfare analysis in the case of marginal labor cost differences.In the expansion part,this paper further considers the impact of involuntary unemployment in small countries on the above-mentioned results.In this part,the paper discusses the influence of the interaction of market size effect,cost-saving effect and employment creation effect on the location decision of multinational corporations in the FDI policy competition.The results of this study can provide a new perspective for the typical facts that a large number of foreign enterprises are leaving China and pouring to Southeast Asian countries.Thirdly,at the level of multi-level government structure,this paper introduces the vertical taxation which is common in the traditional international tax competition model into the analysis framework of this article,and discusses the error correction effect played by the central government in FDI competition among local governments.In this part,the article pays more attention to welfare analysis,that is,how does the central government formulate a balanced tax policy to avoid welfare losses caused by FDI competition among local governments,and guide the total welfare of the country to achieve the optimal goal? In the expansion part,this paper further designs the vertical transfer payment mechanism to solve the problems of fairness and efficiency in the above results.In addition,an additional finding in this part is that it clarifies the motivation of the central government to set up economic development zones from the perspective of local government FDI competition,which helps to alleviate the problem of blindly duplicating the construction of economic development zones.Through the above analysis and demonstration,the main conclusions and innovations of this paper can be summarized as follows:First,with regard to analysis of special interest group lobbying,factor market pricing mechanism,market size and FDI policy competition,this paper finds that special interest group lobbying behavior increases the motivation of small countries to get FDI,so small countries have the opportunity to overcome market size effect to get FDI in FDI competition.No matter which country receives FDI,its national welfare and global total welfare have declined.The fundamental reason for this result is that a country's evaluation of FDI exceeds the economic value brought by FDI,which is caused by very high amount of political contributions or high degree of corruption of the government.If a country can break monopoly pricing power of the factor market,it can reduce the lobbying power of special interest groups and restore the distorted allocation efficiency and national welfare to a certain extent,thus can Pareto weakly improve the results of equilibrium.Second,with regard to analysis of labor cost difference,involuntary unemployment,market size and FDI policy competition,this paper finds that the location decision of multinational corporations depends on market size effect,cost saving effect and employment creation effect.FDI policy competition does not change the location decision conditions of multinational corporations,but affects the welfare of participating countries.The research shows that both countries in competition may win FDI competition and both of them may improve the national welfare from FDI competition,but if the relative advantage of attracting foreign capital in the competition is not obvious enough,both countries may lose the national welfare even if they get FDI.However,no matter which situation occurs,from the perspective of global welfare,because the evaluation of FDI is equal to the improvement of national welfare brought by FDI,the result of FDI competition is efficient.Third,with regard to analysis of central government regulation,local investment competition,transfer payment system and FDI policy competition,this paper demonstrates that central government can eliminate the welfare loss caused by the local government falling into the "bidding war for firms" through reasonable mechanism design,and central government intervention can make FDI competition play a more efficient role in resource allocation.Whether local government aims to maximize the welfare of local residents or to maximize its own tax revenue,central government has the ability to achieve the optimal national welfare in equilibrium.In addition,if the degree of local competition is low,the motivation of central government to set up economic development zones in order to restrict competition is weak,and if the degree of the competition is high,then the central government has a strong incentive to introduce differentiated policies for the establishment of economic development zones,in order to guide the effective allocation of different types of FDI.Under the background of China's increasing openness to foreign capital,the conclusions of this paper are of good reference significance for the central government to correct the "bottom-by-bottom competition" of local governments caused by "Chinese-style fiscal decentralization" and the rational layout of the location of economic development zones.Under the situation of the "Belt and Road Initiative" initiative and the malaise of global FDI,maintaining the sustained growth of direct investment in China should be the goal that the government should pay more attention to.This paper concludes that it is not advisable to simply rely on local financial subsidies based on incentives and preferential policies to distinguish between domestic and foreign enterprises,first,because these policies are mostly controlled by local governments and lack transparency and rules of the game.It is easy to cause the bottomto-bottom competition among local governments and distort the market price.second,this practice is actually directly sacrificing the interests of local enterprises and consumers and indirectly in exchange for an increase in GDP,resulting in inefficient waste of resources.